Thursday, 29 December 2011

What’s so great about balanced budget laws?

(This is an edited version of the original blog. For some reason the last half dozen paragraphs were omitted from the first "publication." Sorry about that.)

Over the past couple of weeks the BC government has suggested it may not be able to balance the provincial budget by 2013-14, as is required by the Balanced Budget and Ministerial Accountability Act.

It’s hard not to sympathize with Finance Minister Kevin Falcon, who has to manage the impact of a deteriorating world economy on provincial government revenues and expenditures.

But my intention here today is not to talk about the fiscal challenges facing government; rather, I want to talk about what it means to make a law that requires government to balance its budget every year.

[Full disclosure: I was a Cabinet minister in the BC Liberal government which enacted the Balanced Budget and Ministerial Accountability Act in 2001.]

A basic feature of our system of government is that each year the government must ask for permission from the legislature to spend money. The request is contained in the documents that accompany the budget speech which the Finance Minister gives in the legislature. The legislature eventually gives permission by passing what’s called a “supply” bill.

If the legislature does not “give” supply, the government will not have the authority to spend money.

All of this is part of the framework within which our system has operated for generations. It is both legal and political. Taxes are levied and supply is granted by law. But the debate over the budget is purely political - it’s about the government’s taxing and spending decisions.

Of course, government usually has a majority in the legislature, so the immediate result is usually not in doubt. But government will also eventually be responsible to the voters for its budget decisions.

In my view, that’s the best accountability tool we have: the electorate. The question whether government has struck an acceptable balance between taxing and spending is ultimately a political question, for voters. It should not be a legal question.

Balanced budget laws change this dynamic.

There are different ways balanced budget laws work. They can be written in a way that gives government some flexibility, and impose different kinds of consequences if the budget is not balanced. But in BC it’s very simple. The law states, “The main estimates [ie, the budget] for a fiscal year must not contain a forecast of a deficit for that fiscal year”.

Put bluntly, the point of making it a legal obligation to balance the budget is to tie the hands of spendthrift politicians. A politician who promises to enact a balanced budget legislation is therefore trying to up the ante on his commitment to fiscal prudence. The not-so-hidden message is that a legal requirement is somehow more serious than a political commitment.

Why am I concerned about this?

First, the argument that politicians can’t be trusted to do the right thing in the absence of a law is not just a cynical perspective on politics; it actually undermines political accountability, because it says that voters can’t be trusted to hold politicians accountable for bad budget decisions.

Of course if a politician is running for office against a government that has lost its political credibility on fiscal matters then it is tempting to make a promise to do something that will make it harder for any politician ever again to practice fiscal imprudence.

But generally, the argument that a law is required to achieve a political objective is an argument that politics is somehow not good enough.

My second concern is that the enactment of a balanced budget law changes the conversation from what government ought to do, which is a complex multi-faceted consideration of a myriad of economic and fiscal policy facts, to what it must do, which is both brutally and deceptively simple, namely, balance the budget. That makes it all sound much simpler than it really is.

In the absence of a balanced budget law a Finance Minister is forced to defend his fiscal policy decisions on their own terms. Is the level of taxation adequate? Are programs and services well designed and properly funded?

A balanced budget law distorts the conversation. Take speed limits, for example. The question for drivers is not, “what would a safe driving speed be on this road?” but rather “what is the speed limit?”. Enacting a law changes the question from what the right or best or wisest thing to do is, to what the law requires.

There’s also a risk when you commit yourself by law to balanced budgets. From time to time - and this is surely one of those times - economic pressures are well nigh unmanageable. So much so that in 2009 the BC government, facing the biggest economic crisis since the Great Depression, amended the Balanced Budget Act to let it run deficits until 2013-14. That’s the deadline that is making the government nervous right now, because the economy has not yet recovered enough to produce the revenues needed to keep pace with expenditure demands.

So not only is government forced to continue the hard work of finding the right “balance” between program cuts, fee increases, and the like; it is forced to consider what it means to have to introduce another amendment to its balanced budget law.

Unlike citizens, governments can change the law, and thereby change the rules by which it operates.

But it does so at peril. How many times can a legislated deadline be extended before the idea that there is a deadline is simply no longer credible? And if the deadline for balancing the budget can simply be extended when government sees fit to do so, do we really have a balanced budget “law”?

And what does it mean for public confidence in the rule of law when government can simply change the law to suit its convenience?

Wouldn’t we be better off without a balanced budget law, and instead with a system where politicians were simply - and yet I would say more profoundly - held accountable for what really counts, namely their fiscal priorities?